March 16, 2023
“He’s like an onion. You have to peel him back a layer at a time.” That’s a quote from the movie “The Blind Side.” In peeling an onion, there are many layers, which means a person or situation is more complicated than its surface appears to be. It also means investigating a matter more deeply, usually step by step, with each step revealing additional discoveries.
Using a knife for the first layer
Imbalances in market power between buyers and sellers can affect prices. In the 1990s, concerns grew among industry and Congress over packer concentration, as meat packing companies were consolidating and expanding and market structures were changing. Concerns came to a head in December 1998. Negotiated slaughter hog prices collapsed to single digits. Formula contract prices did not decline nearly as much. Many people asked why.
Industry participants correctly believed a free flow of complete market information could reduce potential adverse price effects of market power imbalances. They urged Congress to act.
Congress did. As an amendment to the Agricultural Marketing Act of 1946, Congress passed the Livestock Mandatory Reporting Act of 1999 (LMR). The act:
establishes a program to provide information regarding the marketing of cattle, swine, lamb and the products of such livestock that producers can readily understand
improves USDA’s price and supply reporting services
encourages competition in the marketplace for livestock and livestock products
AMS currently publishes 27 daily, 28 weekly, 18 monthly and six annual cattle reports. To get data, AMS analyzes 5,000 to 8,000 records per day under LMR. These records cover 92% of all fed cattle transactions and 33% of all cow and bull transactions. All federally inspected cattle plants that slaughter at least an average of 125,000 head per year are required to report. That’s currently 41 live cattle plants. AMS audits firms to ensure reporting accuracy and preserves confidentiality of transactions.
Additional formula pricing revelations
Since the establishment of LMR, AMS has worked closely with industry to refine the overall effectiveness of the program. The marked decline in negotiated fed cattle trade has generated considerable interest and consternation. In 2005, cash-negotiated trade represented about 55% of the weekly national fed cattle volume. Negotiated grids represented 10%. Forward contracts represented 5%. The remaining 30% were formula trade. Today, cash-negotiated trade has declined to about 20%. Formula trade represents some 60%.
The formula category AMS currently uses is a catchall category. It includes all fed cattle purchases not categorized as negotiated, forward contract, or negotiated grid. Formula purchased fed cattle represent highly varied cattle quality and specifications.
Unfortunately, the range in reported formula prices is so wide that formula prices are not that useful for interpretation. For example, for the week ending March 5, 2023, the price range for steers, over 80% Choice, purchased via formula on a dressed basis, was $242.67 to $319.80 according to the National Weekly Direct Slaughter Cattle Report: Formulated and Forward Contract (LM_CT151) report. These are net prices, reflecting prices paid after application of any premiums or discounts. Base prices are before the application of any premiums or discounts.
On Aug. 9, 2021, AMS began publishing a National Daily Direct Formula Base Cattle report to provide additional insight into formula cattle trades. Daily morning, afternoon and summary formula base price reports are national in scope to ensure confidentiality. Weekly and monthly reports are at the national and regional level and include forward-contract base prices. AMS began issuing a National Weekly Cattle Net Price Distribution report on Aug. 10, 2021.
Cattle Contracts Library pilot program
The Consolidated Appropriations Act of 2022 directed AMS to create a Cattle Contracts Library pilot program. Its goals are to:
Increase market transparency
Improve price discovery
Provide enhanced signals to producers with respect to output and better insights regarding market demand and supply for cattle
Under this pilot program, AMS collects, maintains and reports aggregated purchase information on contracts between fed cattle producers and packers that are within the reporting threshold. AMS estimates that approximately 18 packing plants operated by four packing companies are subject to the pilot.
The first weekly Cattle Contracts Library Summary report was for the week ending Jan. 28, 2023. Reports are published every Monday for the prior week’s trade.
Here’s what’s in the pilot library
The Cattle Contracts Library Pilot Program webpage provides the most recent report. Historical reports are available from the Cattle Contracts Library Summary webpage. The reports are currently only available in PDF format. The availability of an interactive dashboard, the ability to download the data and access the data through an API are yet to be determined.
For the week ending March 3, 2023, there were 178 active cattle contracts. Some of these contracts may have one base price. Others may have several base price options. For example, one contract may have both a USDA report as a base price option and a CME price as an option. Those 178 active cattle contracts offered 225 base prices. A USDA report was the most-used base price at just over 75.66% of contracts using it; 10.18% of base prices were based off the CME, 8.85% were negotiated and 3.98% were top of market. A USDA report may be used to help identify the top of market. The base price source breakdowns add to 98.67% — which is by design, to maintain confidentiality. Because confidentiality is applied throughout the report, not all data may be shown, or totals may not add up to 100%.
The base-price source breakdowns were slightly different when looking at the number of head represented which are reported by month. In January 2023, 763,799 head (76%) had a USDA report as a base price, 136,909 head (14%) used a negotiated base price, 81,801 head (8%) were top of market and 22,122 head (2%) used the CME for a base price for a total of 1,004,631 head.
Of the contracts using a USDA report to establish a base price, which could include top of market contracts, 35.17% used the Nebraska Weekly Direct Slaughter Cattle Negotiated Purchases (LM_CT158) report, 34.32% used the Kansas (LM_CT157) report, 23.73% used the Texas-Oklahoma-New Mexico (LM_CT156)report, 5.08% used the 5 Area (LM_CT150) report, and 1.27% used the Iowa-Minnesota (LM_CT167) report. Note that while a Nebraska report, for example, could be used to establish a base price, the cattle may be fed somewhere other than Nebraska.
Clarifying base price adjustments
Of all the contracts, 27.56% had a base price adjustment. For negotiated base prices this adjustment had a simple average of 65 cents with a 25th to 75th percentile range of 49 cents to 97 cents. The units are $ per cwt. The percentile range is used to ensure confidentiality. For top of market base prices, the average adjustment was $1.37, with a range of 87 cents to $1.50. For USDA report base prices, the average adjustment was $1.11 with a range of 41 cents to $1.72. All these contracts then had premiums and discounts applied. For USDA report base prices, with no premiums or discounts applied, the average base price adjustment was $1.43, with a range of 81 cents to $2.24. Of all the contracts with base price options, 91.11% had at least one premium or discount applied for yield grade, quality, weight, class, branded programs, management programs or other factors.
The contract specs part of the report shows that 88.76% of contracts had a quality specification, 84.27% had a specification for weight, 75.84% for less than 30 months of age, 61.24% for other miscellaneous, 55.62% for yield grade, 48.88% for branded, 41.01% for dressing percent, 37.64% for breed, 33.15% for export certification, 8.99% for starter cattle, 7.87% for volume threshold and 5.06% for supply relationship.
Beef-dairy crossbreeding is a growing practice. However, the degree of substitutability at the fed cattle level has not been widely known. Beef-dairy cross discounts on a per head basis were $20, and on a per cwt basis averaged $2.91 with a range of $1.75 to $4.13, according to the Cattle Contracts Library. This compares to an average per cwt dairy type discount of $28.62 with a range of $11.72 to $40.
This is a pilot program. The funding will eventually run out. The program could cease or could become permanent, subject to funding and support. AMS will continue collecting feedback. All players will keep learning. This is not the last layer of the onion to be peeled back for this program and for the overall cattle market.
Schulz is an Extension ag economist with Iowa State University.
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